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Sunday, January 22, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 20 ‘12

BSE Sensex and NSE Nifty 50 index chart patterns closed smartly higher on a weekly basis. Both indices crossed above their 50 day and 20 week EMAs. The FIIs continued their buying, and DIIs continued their selling to keep the up moves in check. No prizes for guessing that the FIIs prevailed in last week's bull vs. bear contest.

Q3 results declared so far show that India Inc. is facing downward pressure on their bottom lines, even as there have been instances of top line increase. Reliance announced a buyback during the early part of last week, which boosted its stock price and both indices. By the end of the week, the company announced disappointing results, which may trigger a correction.

Both Sensex and Nifty indices are trading within downward sloping channels and below their respective 200 day and 50 week EMAs. That is a sign that the bears are still on top, and the rallies from the Dec '11 lows should be treated as bear market rallies; i.e. opportunities to sell. Breaking above the downward sloping channels and sustaining above them for a few days can finally change the trend. Will the indices be able to do that?

BSE Sensex index chart

The Sensex has moved up smartly above its 20 day and 50 day EMAs, and the 20 day EMA is about to cross above the 50 day EMA. Overhead resistance to a further up move can be expected from the falling 200 day EMA and the upper edge of the downward-sloping channel. The index had failed to cross above the downward channel on three previous occasions. Will it be fourth-time-lucky?

The technical indicators seem to suggest so. Both the MACD and the ROC have entered positive territory and are still rising. But the RSI and the slow stochastic are in their overbought zones from where they appear to be turning back.

Next week has an early settlement because of Republic Day holiday on Thursday. Coupled with the less-than-stellar RIL results, the stage may be set for some profit booking.

NSE Nifty 50 index chart

The weekly chart of the Nifty shows a clear breach of the 20 week EMA on strong volumes, which is a bullish sign. Three of the technical indicators are also showing signs of bullishness. The MACD has crossed above its signal line and the ROC has risen above its 10 week MA, but both are still negative. The slow stochastic has emerged from its oversold zone, but is yet to climb up to its 50% level. The RSI is showing a contra-indication by slipping down after touching its 50% level.

Both indices are indicating short-term bullishness but long-term bearishness. Let us take a look at two breadth indicators to gauge the sustainability of the current rally.

First, the Nifty A-D line:

Note that the A-D line is moving sideways, and failed to climb higher with the Nifty. This is a negative divergence that may trigger a correction.

Now, the Nifty TRIN:

A week ago, the TRIN was at an overbought level of 0.6. Last week, it dropped further to 0.5. Note that in the past 12 months, the TRIN has bounced up from the zone between 0.6 and 0.8 a few times (0.75 is the demarcation level, below which the market is overbought). While the market can remain overbought or oversold for long periods, the upside risk has increased considerably.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns had splendid bear market rallies from their Dec '11 lows, and look ripe for profit booking. RIL's disappointing results may trigger the selling. The fundamental situation hasn't shown any great improvement to sustain a rally. But a flood of FII buying can throw all analysis out of the window. It may be prudent to wait for a break out of the downward sloping channels before deciding on entering.